Term of the Day - 20 February 2024

Today’s Term is “Capital Reduction Scheme”.

A Capital Reduction Scheme refers to a corporate strategy wherein a company strategically reduces its total share capital, typically by cancelling, repurchasing, or extinguishing a portion of its shares. This financial manoeuvre is often undertaken by companies to optimise their capital structure, improve financial health, or distribute excess capital to shareholders.

The process involves obtaining approval from shareholders and, in some jurisdictions, court sanction, as it involves altering the company's articles of association and, in certain cases, reducing the nominal value of its shares. Companies may resort to a capital reduction scheme for various reasons, such as eliminating accumulated losses, enhancing return on equity, or consolidating shares to increase their market value.

Shareholders benefit from a capital reduction scheme through the potential increase in earnings per share and improved financial ratios. However, it's crucial to note that the process is subject to regulatory scrutiny to ensure that it doesn't disadvantage creditors or contravene legal requirements.

While a capital reduction scheme can contribute to financial restructuring and shareholder value enhancement, its execution demands careful planning, legal compliance, and transparent communication to stakeholders to ensure the long-term sustainability and integrity of the company's financial position.